Making Mortgage Overpayments – Should You Do It?

A mortgage is the biggest financial expenditure for the average person- and they’re often a lifetime commitment.

Making overpayments on your mortgage is a great way of reducing your mortgage debt earlier than due, which ultimately means you throwaway less of your money on paying interest! Basically, it’s a great way of saving a buttload of money!

What is mortgage overpayments?

Making mortgage overpayments is when a borrower pays more than than the minimal amount required by the lender. The overpayment can be a one-off chunk and/or setup as a regular payment.

The result of making mortgage overpayments is paying less on interest and paying off your debt early.

So making mortgages overpayments can save you a buttload of money.

Should you make overpayments?

It’s up to you, really!

However, there are a couple of scenarios that come to mind, where it maybe more sensible to make overpayments:

If you want to pay less interest on your mortgage (obviously)

If you have money lying around that really isn’t doing much (excluding ’emergency’ funds)

If your savings rates are lower than the mortgage interest rate you are paying

If there aren’t any caps or penalties for overpaying (more on this further down)

At the end of the day, it depends on your personal circumstances.

I personally wouldn’t make overpayments if it was going to cause financial stress, but definitely would do if I had money laying around in a low-rate savings account (which is lower than the interest rate of my mortgage), or if I had excess disposal income.

An example of how much money overpaying can save!

The interest rate on my repayment mortgage was 5.59%, on a £155,000 loan amount on a 25yr period. My monthly payment on that was £961.40 per month.

I arranged for a £200 overpayment per month, which meant my monthly mortagge payment increased to £1161.40 per month.

So, how much am I effectively saving? Overpaying saves me £45,012 in interest alone, and it also means my debt is cleared 7 years & 6 months earlier.

Mortgage Overpayment Calculator – find out how much you can save by overpaying!

Almost all mortgage providers will allow you to make mortgage overpayments. However, something to bear in mind is that many lenders cap the amount you can overpay by if you are still with in the fixed rate period, usually up to around by to 10%. So you might be limited to how much you can overpay by. If you’re not in your fixed rate period, you probably don’t have a cap.

Lenders have been known to calculate the 10% threshold quite differently from one another. For example, ‘Lender A’ may allow you to make a 10% overpayment based on the overall loan value, while ‘Lender B’ may only allow you to make a 10% overpayment based on the remaining balance (which means the penalty-free limit goes down each year). Some lenders also allow you to carry over the penalty-free allowances to the following year if it’s not used.

Point is, before overpaying your mortgage, check that your lender allows you to overpay it penalty-free, and if there are any limits as to how much you can overpay.

The tool below calculates how much you can save by making overpayments, along with how much time you will be shaving off your mortgage.

Update: Calculator temporarily removed! Be back soon!

[mortgage_overpayment_calc_sc_xx]

Important disclaimer: Please note, this information is computer-generated and relies on certain assumptions (e.g. interest rate will remain the same). It has only been designed to give a useful general indication of costs.

It’s important you always get a specific quote from the lender and double-check the price yourself before acting on the information. We cannot accept responsibility for any errors.

Interest-Only and Repayment Mortgages

I’ve explained how making overpayments for repayment mortgages work, by using the example of my current situation. There’s no difference in theory when it comes to making overpayments with interest-only mortgages.

Many borrowers usually get interest-only mortgages because it means monthly payments will be significantly lower. The usual scenario is that a borrower can afford the interest on a property, but no more than that, particularly in this climate.

However, the main issue with interest-only mortgages is that you only pay the interest on the loan, so you don’t actually reduce the mortgage debt; that’s not a very warming thought for a borrower that wants to eventually pay off their mortgage.

If overpayments [to reduce the debt] are made on an interest-only mortgage, the mortgage balance would be reduced per mortgage payment, and eventually the amount of payable interest would lower, meaning lower mortgage payments.

Let me show you a quick example in real terms…

I have a mortgage of £155,000 on a 25yr agreement with a interest rate of 5.59%.

If I was on an interest-only policy, my monthly interest payments would be £722.04.

As mentioned, I’m not reducing my mortgage this way, I’m just paying the interest on the loan.

If I decide I can afford to pay £800 per month, I would be making overpayments of £77.96 per month.

Over a period of time my mortgage balance would reduce, so the amount of interest I pay would reduce.

Repayment mortgages Vs overpaying on an interest-only policy

So yeah, in case some of you are wondering what the difference is between making regular overpayments on an interest-only mortgage and a repayment mortgage, I’d like to throw in my two cents.

There actually isn’t much difference in terms of what they’re both achieving – they’re both means of reducing debt. However, making overpayments on an interest-only mortgage is more flexible, because unlike with a repayment mortgage – where you HAVE to repay some the actual debt each month – making overpayments on a interest-only mortgage is optional.

Extra Notes and recapping on mortgage overpayments

While overpayments seem like a good idea on paper, it usually always depends on your your own set of circumstances!

Some mortgage policies cap the amount of overpayments you can make per year without incurring penalties, so contact your lender or read your policy to find out of any restrictions apply to overpayments.

Some mortgage policies may not allow you to make overpayments at all, or there may be a certain period from when you can start making overpayments. Again, contact your lender or read your policy to determine any restrictions.

Even the smallest amount of payments can make huge differences in the long run!

If you’re unsure of your options or you would like further details, ask your mortgage lender or talk to a good mortgage broker. Most local highstreet banks will have their own in-house mortgage advisers which should be able to offer guidance at no cost.

Disclaimer: I'm just a simple landlord blogger, I am not qualified to give legal or financial advice. Any advice I give is my opinion based on my experience, and is never legal or professional advice. You should always get professional advice on any legal and financial matters!

16 Comments- Join The Conversation...

CautiousFTB29th December, 2007 @ 19:07

So are you saying that with an interest only mortgage overpayments reduce both the capital and the monthly repayments of the interest?

I'm quite confused by this as I have been reading the details of a key facts mortgage illustration for a interest only mortgage and have noticed under the overpayments section, that it states 'Your monthly repayment will remain the same'.

How can this be? Surely they can not charge you interest on an amount that doesn't exist after you have paid of a lump sum?

1

The Landlord29th December, 2007 @ 19:29

Hey,

Overpayments on an interest-only mortgage will reduce the loan balance. The more you reduce, the less interest you will pay.

2

Kate18th March, 2009 @ 21:16

We have roughly half our mortgage interest only (with an endowment which will hopefully repay at least some of it in the end!)and half repayment. They both have 14 years left to run. We are in a position to overpay but are unsure whether it makes any difference to overpay the interest only part or the repayment part? Does anyone know whether thre is a difference?

3

Jools19th March, 2009 @ 16:42

You really need to speak with an IFA aboiut this. I would be inclined to make overpayments on the capital as opposed to the interest as you are actually paying off some of the balance of a property that you will eventually own.

Complex field that needs specialist advice me thinks!

4

Kelvin23rd March, 2009 @ 11:06

I am a little bit confused.
In the example above is gives how much you need to over pay, but it doesn't say how long for.

Is it for the remaining term? Is it one year that will get you those savings? How does it work?

5

The Landlord23rd March, 2009 @ 11:13

Hey Kelvin,

That's how much you'll save over the period of the remaining term.

The calculation is a little complicated, because each year the amount you pay on interest changes, as you're reducing the amount you're paying interest on.

The beauty about overpayments is that they're flexable. You don't have to make overpayments if you don't want to.

We owe £50k on a interst only mortgage,we have 20 months left on on 5yr fixed rate @ 5.18%, i can now afford to make overpaymets of £500 per month, would you do this or save as we have been into ISA's

7

Helen19th May, 2010 @ 07:46

Does anyone know how can I weigh up the potential benefit of paying off the interest only mortgage, against losing the allowable deduction of interest payments from rental income for tax purposes? In other words is it better to keep my capital earning interest in an another account while still paying interest on the mortgage in order to get the taxable allowance?

8

Lisa8th September, 2010 @ 11:46

I have an Interest Only mortgage of £101000. I am currently on fixed rate which is due to expire at end of September 2010. The payment will go from approx 500 to 200 per month. If I continue to pay 500 per month. What approx will I owe at end of first year, I will be overpaying approx 300 per month = 3600. So would I in effect only owe 97400 the next year? As it is interest only do I start gaing on the first month following the overpayment?

Any advice as I dont want to overpay 3600 if I am only going to be 3000 better off?

Thanks

9

Gilly1st September, 2011 @ 14:31

If I pay off my interest only mortgage earlier than its current 20year term, lets say 5 years earlier.
Will I be asked to re-pay the capital at the end of the original 20yr term or at the 15 year point when I have paid off the loan?
ie - will I have the remaining 5 years left on the original term in order to find the money to re-pay the capital or will I be expected to pay that back earlier also?

10

Croydon861st September, 2011 @ 19:00

@Gilly - I am not sure if I have understood your question correctly. The loan on an interest-only mortgage does not have to paid only at the end of the term, it can be paid during the term, however your bank may have a penalty for doing so. Once this is paid though, lets say in 15 years, you no longer have to pay the loan as you would have already paid it. Is that what you are asking?

I believe interest-only mortgages are the way forward.

Firstly, it is tax deductible as Helen stated and you know exactly what you are paying in interest.

Secondly, most lenders allow you to make repayments up to 10% of the outstanding mortgage per year, so in theory you can make over payments every month, and it will be the equivalent of a repayment mortgage with the tax benefit. Or rather than make monthly payments, you can wait till the end of the year then make one lump some payment depending on how your year has gone, or just keep it in the bank/other investments. Interest-only mortgages give you more choice depending on your risk levels.

11

seagull23rd April, 2014 @ 19:26

I have a repayment mortgage of 127000 and a interest only of 41000 ,I was thinking of switching the interest only (41000)for a repayment .Would it be better to instead use the extra money I would pay for switching to a repayment and pay this as an overpayment ie if it was say £150 to switch then use this to overpay instead .

12

ads3rd May, 2014 @ 08:49

does anyone know how to calculate your mortgage overpayment if you overpay by more each month.

ie mortgage minimum payment each month say £400, actually pay £1000 each month overpaying by £600, keeping the same term say 23 years this brings the monthly required payment down by a few pounds each month - but keeping the same payment of £1000 means i am overpaying by more each month - is there an easy way to calculate this as my overpayment will get bigger and bigger at the same ineterst rate.??

I don't think that calculator working correctly, I got a mortagage which cost me 255 in intrest only yet the calculator give the wrong impression of 412 / month. Not sure what I am doing wrong.

15

The Landlord13th August, 2015 @ 10:12

Hi Essa,

Are you referring to the mortgage over-payment calculator? If so, the monthly payment is meant to increase, because you to set an amount you wish to "overpay" by. Maybe I misunderstood something though.

Can you please just clarify the information you entered? e.g. loan amount, interest rate, loan period and overpayment amount per month. I can take a closer look then.

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